Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy CVR Partners
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo jumbo businesses.
Does CVR meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine CVR's earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Over the past five years, CVR's earnings and free cash flow have been fairly volatile, though they've remained positive.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company |
Debt-to-Equity |
Return on Equity (LTM) |
Return on Equity (5-Year Average) |
|---|---|---|---|
|
CVR |
0% |
7% |
11% |
|
Agrium |
49% |
18% |
16% |
|
CF Industries |
34% |
23% |
31% |
|
PotashCorp |
75% |
30% |
32% |
Source: Capital IQ, a division of Standard & Poor's.
CVR produces lower returns on equity than its peers, though it employs no debt.
3. Management
CEO John Lipinski has been at the job since 2007. He has over three decades of experience in the petroleum refining and fertilizer industries in companies including Coffeyville Resources and El Paso.
4. Business
Nitrogen fertilizer production isn't particularly susceptible to wholesale technological disruption, though the commodity prices it fetches can be somewhat cyclical.
The Foolish conclusion
Regardless of whether Buffett would ever buy CVR, we've learned that while the company has tenured management and operates in a straightforward industry, it doesn't particularly exhibit the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt.
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